Month: November 2018

There are several approaches used in forecasting financial metrics for publicly traded businesses. In this post, we will focus on revenue forecasting for businesses that provide “unit-based” metrics.

What are unit-based metrics? Broadly speaking, these are the fundamental revenue-generating blocks of the businesses. We see them reported in different forms. For example, in retail and restaurants, the units are the actual physical locations. We also see unit-level metrics in subscription-based businesses from movie streaming giant Netflix (and the widely followed “subs” number) to home alarm company ADT to SAAS companies (where reported unit-based metrics include customer acquisitions costs, CAC, and churn.)

We will look at one example to illustrate our approach.

Let’s take restaurant chain Chipotle. Deriving a revenue forecast for the full year next year is relatively simple: we need to know the number of restaurants that the company will have “mid-year” (since we assume no seasonality in openings), the current average revenue per store (a number that is either provided or can be derived), and a certain level of “comparable sales” growth, generally in-line with current trends. Usually management will provide their annual guidance when they report Q4 but, until then, we can have a reasonable estimate.

In the last 8-K with the Q3 results that Chipotle filed, we find the following information:

Chipotle started the year with 2,408 units and expects that it will end the year “at the lower end” of the 2018 guidance range, or, about 130 extra units. We also see that about half were opened by Q2, indicating no seasonality. Our conservative estimate for 2018 year-end units is 2,538.

For 2019 then, since we have the guidance already, we can take the midpoint of the 140-155 guide, or 148 units. This will leave us with a year-end 2019 forecast of 2,538+148=2,686 units.

However, remember that this is the year-end number: not all of these restaurants will be generating full-year revenues, so for our annual 2019 revenue forecast, we will take half the growth, or 74 units. Our “mid-year” forecast for units is now 2,538+74=2,612 units.

We also need to know how much revenue each unit is generating, also known as AUV. Chipotle does provide this number: we can see that for the last quarter, the LTM number is $1.98 mm.

However, the AUV number is not static: Chipotle, and many other restaurants and retailers, provide a “comparable store sales” growth number every quarter. While there is no set industry standard, this number is usually derived from units that have been open for at least a year. We can see that last quarter the number was +4.4%, but also that the number has moved up and down quite a bit historically as the company recovered from its food safety issues, as we can see in Sentieo’s Plotter of this particular KPI.

We can set a range of 2% to 5% for 2019, and now we have all the assumptions that we need.

They are 2,612 units selling $1.98 mm on average, times 2% to 5%. Our revenue range estimate for Chipotle then is 2,612 x $1.98 mm x 1.02 = $5,275 mm on the low end. Our high end estimate is $5,430 mm. We can see that this is not far from the current Street estimate for Chipotle’s 2019 revenues, as listed in Sentieo’s Equity Data Terminal.

What will make a real difference here is knowing whether the unit openings will be front-loaded, even, or back-loaded, as well as current comparable sales growth trends. We might not get additional clarity on that until the report. However, we can try to estimate the real-time comparable sales trend using Sentieo’s Mosaic alternative data composite index, which shows strong current KPI trend so we are comfortable being above the Street estimate.

The desire for a more powerful document search and the need for document tagging and annotation abilities were the primary reasons that the RGA team wanted to switch to Sentieo.

Prior to Sentieo, they were using Bloomberg. They have since removed a Bloomberg license, as Sentieo has rendered it redundant.

“Nothing else on the market came close to offering us a streamlined and collaborative platform for reviewing and annotating company documents and transcripts. We were intrigued by Sentieo’s impressive capability to pull as-reported data into Excel. A web-native, cloud platform was a big plus.” – Jason Gilbert, RGA Investment Advisors

Jason wakes up around 5:30 am and starts the day reading through a vast array of morning digest emails and the WSJ via his iPad. Afterward, he logs into Sentieo to check his followed tickers and peruse any news that he may have missed. During earnings season, he’ll generally spend more time in Sentieo Document Search looking through earnings transcripts. If he sees that Elliot has already annotated a given transcript, he’ll generally access it through the Sentieo Notebook and use Elliot’s highlights as a guide.

For Elliot, no two days are alike, but he almost always starts by catching up on news in the morning:

“I have Sentieo email alerts setup for every stock in our portfolio and for our primary watchlist…That gives me something to look through every day before moving onto my primary research objectives.”

When screening for ideas or after being recently introduced to a stock, Elliot reads the most recent filings and 10-K, highlighting and annotating along the way. He runs document searches for key terms of interest and gathers some historical context. When building models, he uses Sentieo to extract tables directly from the 10-Q and 10-Ks. Like Jason’s, a good chunk of Elliot’s day is spent reading and marking up transcripts in Sentieo during earnings season and conference season. Jason and Elliot find themselves using Sentieo’s Document Search, Notebook, Watchlists, Alerts, and Equity Data Terminal the most frequently throughout their workdays.

Document Search and Excel Modeling

Elliot’s favorite feature is Document Search because it’s “so simple and easy to use and invaluable in numerous contexts.” Document Search and the Notebook are “without a doubt” Jason’s favorite features. They both run keyword searches multiple times a day.

Watchlists, Alerts, and Redlining

Elliot’s favorite feature is Document Search because it’s “so simple and easy to use and invaluable in numerous contexts.” Document Search and the Notebook are “without a doubt” Jason’s favorite features.

They both run keyword searches multiple times a day.

The team uses watchlists to track the companies tickers that interest them, opting into “crucial” email alerts for new documents and price news. They also heavily use Sentieo’s redlining comparison tool regularly during big filing seasons, and especially on 10-K’s.

The Notebook (Research Management System)

Jason and Elliot use the team note-sharing and collaboration features within the Notebook to share ideas and keep each other up-to-date. Elliot’s second favorite Sentieo feature is highlighting because “it’s fantastic to have all my markings stored in one place, neatly.” They both use document highlighting and annotation tools multiple times a day.

Equity Data Terminal

“It’s amazing how much cleaner this data is presented in Sentieo versus in Bloomberg. It was easy to overcome my inertia here.” -Jason Gilbert, RGA Investment Advisors

Jason uses the Sentieo Equity Data Terminal multiple times a day to check company summary pages, which display everything from the company description to valuation and price targets, historical charts, estimates, and much more.

“My biggest time savings come from having neat sorting and access to information in the Sentieo equity data terminal, and from easy recall of key things that I may have noted through the Sentieo Notebook.” – Elliot Turner, RGA Investment Advisors

Mobile

Jason uses the iPhone app often, mainly for staying updated on his followed tickers.

A picture is worth a thousand words — or maybe around $2 bn (which happens to be CAKE’s market cap). Three of Sentieo’s core functions are table extraction, plotting and record management. In this blog post, we demonstrate how analysts use these convenient functions to visualize a company’s financials in minutes.

CAKE, like many other restaurant companies, reports its Income Statement in a non-standard format: there is no all-encompassing COGS. Instead, we see different line items with different cost buckets, such as food costs, labor costs, and occupancy costs. In its earnings release 8-K, CAKE also calculates each of these line items as a percentage of sales.

Using Sentieo’s Time Series Function, we will build a time series containing the major operational line items: food costs, labor costs, and “other” operating expenses.

After the extraction, we can review the numbers by document by clicking ”Next’ (always check to see if the numbers are a 6-9-12 month summation, or just the Q4 is a 12-month. See the boxes in the lower left that help the adjustments). From here, one can open the source document, export to Excel, or open in the Plotter charting engine — after checking the numbers. For companies that change formats, you can enter the correct number in the columns on the left field. We do this here for Q1 and Q2 2015 as the numbers appear without a “%” signs.

The corrected numbers for 2015 look like this:

After we have made sure that the numbers look good (all are coming from quarterly columns, all are in the same percentage format), we open the data in Plotter.

Since all numbers are given as a percentage of sales, we can merge the Y-axes from the chart settings.

To get a better idea for the underlying cost trends, we are muting the quarterly numbers for each series, and adding a 4-quarter moving average. We can also customize colors, line format and line thickness.

Here we can see the longer term trends. While food and occupancy costs have stayed relatively steady (as a percent of sales), we can see that labor expenses have been moving up.

We are now ready to save, tag, and share the chart with the team.

The chart is now a part of our CAKE Notes, and can be commented on, added to full theses, or to other Notes inside Sentieo’s Notes Records Management System.

We recently introduced an enhancement to our document markup functionality: Sentieo Capture.Within documents in Sentieo, you’ve had the ability to highlight, annotate, and tag your colleagues within important passages of text. Oftentimes, you’ve also come across important graphics such as charts or tables that you may have wanted to collect and save.

With Sentieo Capture, you can now:

Capture any portion of a document (such as a capex breakout slide from a company’s investor presentation).

Mark up the capture with shapes, arrows, and lines of text.

Save the captured area as an image (along with the source document) directly into your Notebook.

As with highlights, you can also add label(s) and annotations to your captures.

Why Should I Use Sentieo Capture?

While performing a deep dive analysis on a company, investment professionals are likely to face information overload, which can make it challenging to effectively manage all the information being consumed. Ultimately, effectively managing information and data becomes one of the key skills of a successful investment professional:

How do you collect information snippets from the documents you are reading, and then create a summary report?

How do you record the link (URL) to remember the source of the document along with your information snippet?

How do you organize the information you’ve collected so that you can easily retrieve it at a later time?

When collaborating with others on your team, how do you efficiently share and update this information?

You have probably used various tools to tackle these questions, including the Windows Snipping Tool, MS Outlook, MS Word, MS OneNote and Evernote. These are all great tools and have their own particular strengths, but they do not solve the a major problem in the investment professionals’ information capture flow: having to source, organize, remember, and be able to retrieve your research.

At Sentieo, we are building features to replace the fragmented information capture workflow to become a one-stop solution for managing, sharing, and retrieving the information you’ve gathered on a company or topic. That way you can come up with a meaningful conclusion using all of the information you’ve gathered, and not just bits and pieces. In this post, we’ll nudge you into trying a slightly different approach when doing your company research in Sentieo.

How Do I Use It?

The Capture feature can be triggered via the photograph icon located in the upper-right corner of the document that you are viewing. There is no real setup required other than making sure that you have installed the Sentieo Chrome extension, which you will be prompted to do if it is not already installed.

To enable capture mode, simply click the “Capture” button on the toolbar while viewing any document within Document Search or your Notebook:

Begin your capture by selecting the area you would like to capture and clicking and dragging:

A new screen with your captured area will appear, allowing you to:

Name your capture

Mark up your capture with the annotation tools menu

Copy to clipboard, e-mail out, or save the image to your computer

Add a label or annotation to your capture

Save or discard your capture

Where is this information being stored, and what can I do with it?

All of your bookmarks, highlights, annotations (and now captures) are also stored and searchable within your Sentieo Notebook. This also means that your information is available from any computer with Google Chrome and an internet connection.

Like highlights, all of your captures are automatically sent to your Notebook and populated with the source document title and filing date, any relevant company tickers, and any labels and annotations. This automatic tagging makes retrieving your highlights and captures a breeze in the future.

Additionally, you can share selected research with the rest of your team and people outside of Sentieo. You can also view what others have shared with you.

We hope that Sentieo Capture saves you more time and keeps your research more organized. Give highlighting and Capture a try; you won’t want to do your Sentieo research without it! Please message us via customer support chat, or email nauman@sentieo.com with any feedback on the functionality that you would like to see added to the new capture feature! Haven’t used Sentieo yet? Get a free trial.

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Nothing on this website should be considered investment advice. We do not make recommendations (long or short) in any securities. We do not express opinions as to whether any company's accounting practices are in violation of SEC, GAAP, IFRS or other rules/regulations.